Arm’s Length Mortgages: Enjoy Significant Rewards with Reduced Risk

What if you could earn over 10 percent on your RRSP investments with just slightly more risk than a savings account?

You might not think of home mortgages as a possible investment market. After all, most people associate mortgages with banks – and with huge stacks of paperwork. They don’t ever think they could get into making that sort of money.

They also don’t understand how much money you can make in mortgage investment. After all, a lot of the banks right now are offering rates below 6 percent on 30-year mortgages. That’s higher than what you get from a savings account – but not that much higher. The key for the banks is the benefit of volume.

If you want to invest in mortgages, though, you wouldn’t be serving the same applicants that the banks face. Instead, you would be working with one (or multiple) borrowers who represent a higher degree of risk. They either have credit scores that keep them from gaining acceptance from the banks, or they lack the verifiable income history that makes their applications solid enough – or both. You would be investing in the private mortgage market – and you could easily make well over 10 percent with the mortgage you granted.

How does it work? You serve as an investor (or the investor, if you have enough money) in an arm’s length mortgage, using your RRSP funds to help someone else achieve the dream of home ownership. Then you rake in the payments, month by month, earning well over 10 percent per year.

That’s right – you can use your RRSP money to fund mortgages for other people, so long as the transaction is “arm’s length.” This means that you are not related to the party. Throughout Western Canada, these mortgages are becoming more and more popular, as borrowers are having a harder time getting bank approval for their mortgages from lenders but they still have enough money to pay for a mortgage over time.

So how can you use RRSP money to fund mortgages? You can fund your own (but you have to pay it all back within 15 years). You can use RRSP money to fund a non-arm’s length mortgage for a family member, generally as a favor – but this has to be a first mortgage, and you have to get full CMHC insurance, and the qualification process for a normal mortgage applies. An arm’s length mortgage can be the first, second or third note on a property but may not be to someone in your family or extended family.

How do arm’s length mortgages benefit RRSP investors?
When you make an investment in an arm’s length mortgages, there are a number of benefits. Let’s take a look at some of them:

Reliable Return on Investment.
For the life of the mortgage, you get money coming back to you at the same rate of interest. This can give you an APR as high as 30%, depending on the loan, so you can make a lot of money. Even if it’s just 12%, that beats the market in many cases.

Easier Retirement Planning
Once you leave the workforce, it can be worrisome not knowing how much interest income you can expect from your portfolio each month. Using an arm’s length mortgage allows you to know exactly what to expect, month by month, to come into your RRSP account.

Reliable Term of Investment
When you sign the paperwork on this loan, you’ll already know how long you can expect the money to be gone from your RRSP account – and when it will be back with interest.

Secured by Real Property
Foreclosures are extremely rare in Canada – much more rare here than they were south of the border, when banks were failing left and right. Today, when you invest in a private mortgage with your retirement funds, in the extremely unlikely case of default, you have a property to take and to sell. This is a lot more reliable than simply buying an investment in a commodity or stock and just having a piece of paper.

Unlimited Investment Potential
When the investment you made in one mortgage returns in full to your RRSP account, you can invest in another person’s mortgage. Of course, if you don’t want to choose another mortgage, you can choose any vehicle you want, whether it’s stocks, bonds, mutual funds or something else.

No Impact on Contribution Limits
You’ll be getting a check in your RRSP account each month as the borrower repays the note. However, that doesn’t count toward your own contribution limits. So you can keep investing up to the full contribution limit at the same time that the borrower is paying you back for the loan.

Hassle Free Experience
If you rent out a property to a tenant, you have a lot of potential headaches – missed rent, maintenance and replacing the tenant. With an arm’s length mortgage, all you have to do is sign the paperwork. A lawyer and trustee handle the day-to-day management of the situation for you. All you have to do is go to closing and sign the documents and then wait for the money to arrive in your account each month.

So how does it work?
Right now, in Canada there are two trust companies that deal with arm’s length mortgages: Canadian Western Trust and Olympia Trust.

What kind of funds can you use?
Well, we have talked a lot about RRSP funds. However, you can also use RRIF (Registered Retirement Income Funds) or LIRA (Locked in Retirement Account) funds.

You also don’t have to use liquid funds. If you have stocks, mutual funds, term deposits, debentures, bonds, gold and silver certificates, equity linked notes or guaranteed income certificates (GICs), those work as well.

If you’re interested in learning more, give one of our arm’s length mortgage experts at a call. Once you have determined that investing in private mortgages is for you, you will begin to see opportunities to add to your existing portfolio.